bank rates

Political Uncertainty Has Me Looking At Short-Term CDs In Case Rates Increase

Looking at short-term CD ratesFor more than a year, my yield-chasing instincts have had me putting most of my maturing CD money into 3-, 4- and 5-year replacements.

Today, more than half of my portfolio has remaining maturities exceeding two years.

For CDs maturing later this year, however, I’m inclined to shorter replacement terms — like 1-year certificates of deposit — to hedge against an unforeseen increase in yields in 2013.

Although rates seem likely to remain stuck at rock-bottom levels, there’s some uncertainty surrounding financial markets — namely, the impact of potential political changes in Washington or of a possible tumble off the “fiscal cliff.”

Shorter maturities seem in order — at the right CD rates.

I’ve already begun at AIG Bank, where I agreed to a 1.00% APY to keep part of my money there for another year.

I also have a bunch of Bank of Internet CDs maturing this fall.

BOI’s current 12-month rate is 1.10% APY, and it sometimes offers a rate “bonus” for renewals.

Ally Bank, where most of my maturing CDs reside, presents a dilemma.

Do I go with 12-month renewal CDs, or do I establish long-term CDs, adopting the so-called “early withdrawal strategy”?

Were I to roll a maturing Ally CD into a 12-month replacement today, I’d get a relatively hefty 1.29% APY (Ally’s 1.04% posted APY plus its current 0.25% “loyalty reward” for renewing CD customers).

However, were I to move the money into a 60-month CD instead, I’d get 1.97% APY (posted rate plus reward).

If I closed that after a year, I’d realize a 1.64% return (annual interest less Ally’s unusually low 60-days’ interest penalty).

As a former lawyer, I’ve always been wary of relying on Ally’s low early withdrawal penalty in choosing a CD maturity.

That’s because Ally’s deposit account agreement says: “We reserve the right to … make changes to accounts or services.”

Although standard, this language allows Ally to impose on existing CDs a much higher penalty or to eliminate existing early withdrawal rights altogether, after giving 30-days’ notice under the Truth in Savings Act.

If it did this, say, three months after I opened a 5-year CD, I might feel pressured to bolt, thereby earning less than 1% for my trouble.

Nevertheless, the risk of this happening over the next year seems remote.

Anyway, I have until Oct. 7 (my first maturity date) to think it over.

(And, you know, the great thing about blogs is they allow you to think out loud!)

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  1. Charles Rechlin said:
    on September 6th at 10:30 am

    Ally just dropped its 5-year rate–for the second time in the last week. It’s now 1.69% APY. I figure the bank just finished wading through Ben Bernanke’s prose at Jackson Hole (it takes a while), and realized he’s promising never-ending monetary easing. Next stop–a 1% 60-month rate?

  2. Charles Rechlin said:
    on September 7th at 02:36 pm

    One more Ally follow-up: I received the maturity notice today on my CD maturing on 10/7, and it indicated that I would be getting the 25 basis point loyalty reward. The bank had earlier told me the reward program expired on 9/30, so it looks like (as with all previous expiration dates) Ally has extended it further.